Download EOCT Study Guide

EOCT Study Guide
Adapted from GA Dept. of Education Economics EOCT Study Guide
Unit 4: International Economics
Topic 1: Advantages of International Trade
- International trade occurs because each nation takes advantage of their strengths by specializing in
producing certain products and trading for other products
- A nation’s economic strengths relative to another nation’s strengths can be described with the following
two terms:
o Absolute Advantage- The ability of a nation to make more total number of a product than
another nation
o Comparative Advantage- the ability of a nation to make a product at a lower cost than another
nation
 A nation should always specialize in producing products for which they have a
comparative advantage even if they have an absolute advantage in multiple products
- International trade benefits all participants
o Each country takes advantage of its strengths, which increases the economic well-being of each
- When nations trade with one another, two terms are used to describe this trade:
o Balance of Trade (Trade Balance) is the net export of a nation. In other words, the value of its
exports minus the value of its imports. If positive (exports greater than imports) a nation has a
trade surplus, if negative (imports greater than exports) a nation has a trade deficit.
o Balance of Payments is the value of all economic transactions (not just exports/imports). It
includes net exports and other items such as transfer of capital goods and investments.
Topic 2: Issues Concerning International Trade
- Nations sometimes enact barriers to trade- anything that limits trade between nations- even though
economically, they would benefit from free trade
- This is called protectionism because protects domestic industries from international competition.
- Nations use protectionism (trade barriers) to protect industries that are vital to national security.
- 5 Types of Trade Barriers
o Tariff- a tariff is a tax on an imported good. This increases the price of that good, thereby
decreasing demand. A tariff may help a domestic producer stay in business even though an
imported good (without a tariff) would be cheaper for consumers
o Quota- a quota is a limit on the amount of a good that can be imported. Even though imports are
cheaper, only a certain amount is available. Consumers are forced to buy more expensive
domestic goods when the quota has been reached.
o Embargo- an embargo is a quota set at zero. There can be embargoes on certain goods or against
entire nations. These prevent consumers from trading with other nations.
o Standards- the government of one nation may require products to meet certain quality standards
that are not required by other governments. These standards must be met in order for these goods
to be imported; this can drive up prices and limit a nation’s ability to trade those products.
o Subsidies- the government may make payments to domestic producers, which are designed to
lower the production costs for domestic producers. This allows them to offer their products at a
lower cost than foreign producers who do not receive subsidies.
- Problems associated with trade barriers (protectionism):
o Higher prices: trade barriers almost always lead to higher prices, which are paid by consumers.
So domestic producers benefit from protectionism, but the higher prices can hurt consumers.
o Inefficiency: protectionism prevents domestic businesses from competing with international
businesses which allows inefficient businesses, who would otherwise have been outcompeted
and forced to close, to remain open. Over the long term, this weakens the national economy.
- Trading Blocks: many nations try to avoid the problems associated with trade barriers by forming
international groups which promote free trade with each other.
o Examples include: The European Union, NAFTA, ASEAN
Topic 3: Exchange Rates
- The exchange rate measures the price of one nation’s currency in terms of another nation’s currency
- Every nation’s currency has a different value and because consumers must exchange currencies to buy
foreign products, the exchange rate is very important to them.
- Exchange Rate Tables:
o Information about the current exchange rates can be found on a table like the one below.
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This table shows the value of the US dollar relative to 7 other currencies and the value of those
currencies relative to the US dollar.
o The first column shows how much 1 US dollar is equal to in other currencies. For example,
$1.00 is equal to 0.49 British pounds or 5.17 Danish krones.
 If you want to see how much more than 1 dollar is equal to in other currencies you just
multiply. For example, $5 is equal to 2.45 British pounds (5 x 0.49)
o The second column shows how much one unit of another currency is equal to in US dollars. For
example, 1 Pound is equal to $2.06 and 1 Danish krone is equal to $0.19.
 If you want to see how much more than 1 unit of another currency is equal to in US
dollars you just multiply. For example, 5 Danish krones is equal to $0.95 (5 x 0.19)
Changes in exchange rates:
o Exchange rates change when the value of a nation’s currency changes.
 Appreciation happens when the value of a nation’s currency increases (strengthens)
 Depreciation happens when the value of a nation’s currency decreases (weakens)
o These changes are the result of increased or decreased demand for a nation’s products.
 If demand for a nation’s products increases, demand for that nation’s currency also
increases, which leads to appreciation.
 If demand for a nation’s products decreases, demand for that nation’s currency also
decreases, which leads to depreciation.
o Changes to the exchange rates affects different groups of people differently
o Appreciation of a nation’s currency:
 Benefits its consumers because they can afford to buy more foreign products with the
same amount of money. In other words, their purchasing power increased. The foreign
nation’s producers also benefit because they can sell more products.
 Hurts its foreign consumers because they can not afford to buy as many products with the
same amount of money. In other words, their purchasing power decreased. The domestic
producers are also hurt because they are not able to sell as many products.
o Depreciation of a nation’s currency:
 Benefits its producers because they can sell more products to foreign consumers, whose
purchasing power has increased. This also benefits foreign consumers.
 Hurts its consumers because they can not afford to buy as many products because their
purchasing power has decreased. This also hurts the foreign producers, who cannot sell as
many products.